U.S. Dollar Continues to Strengthen
Despite economists bracing for the dollar to weaken due to the Fed’s new dovish tone, it seems that the greenback is only continuing to rally. As CNN Business reports, the dollar has rallied 1.5% since January 30th — the date of the last Fed meeting. Not only is this development coming as a surprise to observers, but it could also serve as a headache for multinational corporations.
Although a strong dollar is good in many regards, it can hurt U.S. companies that do business internationally. That’s because the exchange rate back to dollars can cut into a corporation’s profits. In turn the lower earnings can drag down stock prices, thus affecting investors as well. Moreover CNN notes that many of the top businesses impacted by foreign exchange rates are also those often found in many mutual funds and retirement accounts.
Now that the dollar rally is rolling, there’s a good chance the strengthening will continue. That’s because the U.S. economy is currently looking to still be in good shape as Europe, the United Kingdom, Japan, and elsewhere experience slowing. Also among those seeing slowdowns is China — a country that America has been locked in a trade war with for several months now. As Jameel Ahmad of the foreign exchange brokerage firm FXTM notes, “China’s moderating economic conditions remain a major overhang for the global growth narrative.” This slowing could mean that the dollar looks like the best alternative — even if it’s a last resort. To that point, Boris Schlossberg of BK Asset Management told CNN, “It’s not a question of people flocking to the dollar because they want to. It’s that the data from Europe and China and elsewhere has just gotten markedly worse.”
On the bright side, a strong dollar has traditionally meant good things for travelers looking to make their dollars go further. A desire to take advantage of these deals could also serve to boost U.S.-based airlines that have been hit following lower sales projections and, to a lesser degree, issues surrounding the TSA during the government shutdown.
Per usual, the currently strong and strengthening dollar is a mixed bag for investors and businesses. While the negative effects have been evident in past earnings reports, the continued trend could be even more pronounced in subsequent quarters. At the same time a lot of what happens with the dollar will be informed by what’s happening with other world economies. With that, expect an even greater interest in China-U.S. trade relations and the Chinese economy overall.